The promise of AI continues to dominate venture capital, driving valuations of startups to new heights as big funds and corporations plow money into the top names. High valuations, however, are making exits rare—especially in a market weighed down by higher interest rates, inflation, and a war that shows no signs of ending.

Even so, investors are not necessarily stepping back from AI.

“The near-term pipeline remains sparse,” according to PitchBook’s first quarter report on VC valuations and returns. While 15 VC-backed companies went public in the first quarter, the analysts who authored the report said that “the annualized pace for 2026 remains well short of what is needed to meaningfully reduce the years-long backlog of companies awaiting liquidity.”

The most highly-anticipated—and hyped—deal is Elon Musk’s SpaceX, which is targeting a $1.75 trillion valuation in a June IPO that would make it the largest on record. SpaceX, however, is something of an outlier because it combines space, defense tech, and AI in one company.

There’s also much talk about a 2026 IPO for the two giants of AI—OpenAI and Anthropic. If that happens, the three companies together could represent $3 trillion in value, far greater than what’s been returned by VC-backed companies in recent years, PitchBook said.

These success stories, however, may be as much of a problem as a panacea. First off, given the uncertain state of the markets today, some investors think these two deals may be pushed off into next year. And even if they happen, there are downsides.  “If they take up all the available capital, a broader recovery could slip into 2027, further straining an already difficult liquidity environment,” according to PitchBook.

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That is already a big issue. AI-related companies now make up half of the VC market’s valuation. The rest of the market is “fighting for capital and staring at expected returns well below those of the past,” PitchBook said.

Steve Brotman, founder and managing partner at Alpha Partners, agreed that AI-related companies are taking all the oxygen in the VC market. But he says that’s not a bad thing.  Some 70 percent of the capital in his firm’s third fund is invested in AI-related companies. “So I’m pleased to hear this,” he said.

Brotman told Institutional Investor that “we’re in an AI supercycle,” which he predicts is akin to the industrial revolution. In the future, he said, “every company will be an AI company” in some fashion. He anticipates that in the future, tech will make up 60 percent to 70 percent of the S&P 500, up from 45 percent today.

But there will be losers. Consider the threat of AI that hit the software sector in the first quarter. “Many late-stage software unicorns with credible near-term IPO paths saw their public market comparables aggressively marked down, narrowing the window available for new listings,” PitchBook said.

The private valuations of AI companies are much higher than those of other VC companies. During the first quarter, Series A AI companies received a premium of 84 percent over other non-AI peers. For Series B, the AI premium is 55 percent, up from 39 percent in 2025. But that means investors will need to see even greater returns on these companies.

“For investors competing for AI deals, rising entry prices compress the return multiple at exit,” it said. That becomes more difficult to achieve the longer the markets are in the doldrums.

On the positive side, venture performance is improving. Last year’s third quarter was the fifth consecutive quarter of positive returns, with the rolling one-year IRR rising to 14.6 percent. Dry powder is also dropping—to $278.5 billion, down from a 2023 peak of $323.3 billion, although that is at least partially due to what PitchBook calls a “subdued fundraising backdrop.”

Still, many VC-backed companies remain in a “liquidity standoff,” PitchBook said. Vintage 2019 and 2020 funds are showing distributions “among the lowest of any vintage at that stage since before the global financial crisis.” That matters because funds that don’t make early distributions rarely make up for it later.

Companies are essentially being forced to stay private longer, pushing funds beyond their 10-year cycle while deferring distributions. PitchBook said that even the secondary market, which is still small for VC companies, offers limited relief.